Abstract- New audit technologies should be adopted in a well-planned and actively managed manner to ensure that the optimal benefit is derived from them. There are two types of new audit technologies. The Type 1 group consists of technologies that automate current and well-established audit activities. These increase audit efficiency, that is, lower audit costs, when the savings from the reduction of the formerly required staff time is greater than the cost of the purchase and application of the new technology. The Type 2 group, on the other hand, is composed of technologies that presents new approaches to auditing. Like Type 1 technologies, these technologies may also result in a change in the delivery medium. However, Type 2 technologies goes a step further by also transforming the evidential matter. Audit efficiency is achieved through Type 2 technologies when more weight is assigned to the newly available evidential matter than to the old.

Technologies as a Source of Audit Evidence

The focus of much of the currently available--and rapidly growing--body
of literature regarding audit technologies is on the technologies
themselves, both the hardware and the software. However, to understand
how audit efficiencies are created--or audit costs reduced--through the
use of both high-powered computers and available software, it is
important to clearly recognize their role in the audit process.

According to SAS 31, Evidential Matter:

Most of the independent auditor's work in forming his opinion on
financial statements consists of obtaining and evaluating evidential
matter concerning the assertions in such financial statements.

Professional standards explicitly require that "sufficient competent
evidential matter is to be obtained...to afford a reasonable basis for
an opinion regarding the financial statements under examination."
However, GAAS provide the auditor with a relatively flexible framework
within which to decide what constitutes "sufficient competent evidential
matter." It is not surprising that significant variation exists in the
specific procedures applied on individual audits.

It is important to recognize that audit technologies and audit
procedures may be usefully thought of as being synonymous. Broadly
defined, audit technologies encompass the full set of tools available to
the auditor for gathering and evaluating evidential matter. While many,
if not most, new audit technologies are computer based, it is important
to also focus on the use of the information being produced by the
technologies, rather than only on the mode of delivery. To understand
the efficient use of new technologies in auditing, it is critical to
recognize how they are used by the auditor as a source of audit
evidence.

Two New Audit Technologies

It may be helpful to classify new audit technologies as either: 1)
technologies that automate existing, established audit procedures; or 2)
technologies that introduce new approaches to auditing.

Type 1: Technologies that automate existing, established auditing
procedures. New audit technologies are often applied in the automation
of existing, well established procedures. The particulars will differ
across individual audits and auditors. However, examples are the use of
spreadsheet software to generate year-to-year variation calculations for
analytical review and the application of computer software to perform
test footings of client ledgers and trial balances.

The key to identifying Type 1 applications is to compare the nature of
the test being performed through use of the new technology to that which
was performed in the past. If the two are essentially the same then the
application is of the automating type. For example, if you adopt
spreadsheet software to perform essentially the same calculations for
follow-up in analytical review procedures as you had previously
performed with a calculator or adding machine, then you have an
automating application. The medium may be different, but the message--
the evidential matter produced--remains the same.

Type 2: Technologies that introduce new approaches to auditing.

In contrast, the application of a newly-adopted technology may generate
evidential matter that was not previously utilized by the auditor. In
these cases, the new technology introduces a new approach to auditing.
Continuing with the analytical procedures example introduced above, the
adoption of multiple regression analysis, where only simple year-to-year
variation analyses had previously been performed, would be an example of
a technology that introduces a new approach to auditing. A similar
example is the incorporation of industry data, retrieved from a CD-ROM
data base, in analytical procedures where previously such data was not
part of the process.

However, as with identification of the automating technologies, the key
here is the comparison of the evidential matter produced with the new
technologies to that which was generated through the procedures
performed in the past. Again, the focus is on the message--the
evidential matter being generated--rather than on the medium being used
to produce that message.

The sidebar on page 60 offers a detailed illustration of the differences
between these two types of new audit technologies.

Using New Technologies

Clearly, judgments concerning the nature and extent of audit procedures
are critical to ensuring the quality of the audits being performed. From
the standpoint of efficiency, the auditor's goal is to plan and execute
the set of audit procedures that will generate "sufficient competent
evidential matter" at the lowest possible cost in the particular
engagement circumstances.

The discussion that follows explains how audit efficiencies are achieved
for the two types of new audit technologies described above.

Type 1: Technologies that automate existing, established auditing
procedures. By definition, the evidential matter produced on a
particular audit with this type of new technology is the same as that
previously generated. Enhanced audit efficiency results from the use of
this type of technology when the evidential matter is produced at a
lower cost than had previously been the case. Frequently, these lower
costs result when the savings from the reduction of previously necessary
staff time more than offset the cost of acquiring and applying the new
technology.

Type 2: Technologies that introduce new approaches to auditing. Audit
efficiencies are produced with new technologies when something old is
replaced by something new. However, an important distinction exists
between the two types of new technology. In the case of Type 1
technologies, the medium changes, but the message remains the same. For
Type 2 technologies, the delivery medium may also change when new
approaches to auditing are adopted. However, with this latter type of
new technology, the message -- the evidential matter produced -- is
changing as well.

Audit efficiencies can be produced in two ways with Type 2 technologies.
First, the new technology may produce and process evidential matter at
lower cost than its predecessor; this is similar to the creation of
efficiencies with the Type 1 technologies discussed above. However, in
many cases, the cost of acquiring and using the new technology may
substantially exceed the cost of the audit procedures previously
employed. Fortunately, there is a second, and potentially much more
potent way in which audit efficiencies can be produced through Type 2
technologies. Substantial efficiencies can result when the auditors are
able to both substitute the newly available evidential matter for the
previously generated evidence, and assign greater weight to the new than
to the old.

For example, in certain situations the auditor may be able to eliminate
or significantly reduce detailed testing of sales transactions if he or
she is willing to place substantial reliance on a multiple regression-
based analytical procedure. But, to achieve these greater benefits, the
auditors must be willing to stop performing or significantly reduce the
extent of previously used auditing procedures. In addition, the auditors
must be willing to place substantial audit reliance on a new form of
evidential matter with which they may be much less familiar.

Evaluate on an Audit-by-Audit Basis

We do not recommend that individual technologies be thought of as being
purely Type 1 or Type 2 in all situations. Rather, an understanding must
be developed of the "technology in use" on an audit-by-audit basis.
Further, this understanding must be developed within the historical
context of each audit, with a knowledge of the audit procedures
performed in the past and the manner in which they will change if a new
technology is adopted.

Individual Auditors "Make it Happen"

The benefits of new audit technologies will not be realized on
individual audit engagements unless the auditors involved "make it
happen." Audit efficiencies clearly do not result simply from the
availability of new audit technologies. Rather, any audit efficiencies
that are achieved will occur when auditors actively reduce or eliminate
some procedures that were performed in the past. Adoption of a new
technology without active replacement of something previously performed
can have disastrous results from the standpoint of audit efficiency. Not
only will cost savings not result, but the cost of the audit will
increase by the cost of acquiring and using the new technology.

New Must Replace the Old

A difficult task for managers of audit technology is persuading auditors
to adopt a technology that introduces a new approach to auditing.
However, the most difficult task may be persuading auditors to abandon
sources of audit evidence with which they have become comfortable. The
challenge in the management of new audit technologies is achieving both
of these tasks simultaneously. If traditional procedures are not
sufficiently reduced in the year when a new technology is adopted it may
be difficult, if not impossible, to ever realize efficiencies by using
that particular technology.

Manage the Process

The adoption of new technologies must be actively managed to ensure
maximum benefit from their use, and everyone involved in the audit must
take an active role in this management process.

AN ILLUSTRATION OF THE TWO TYPES OF NEW AUDIT TECHNOLOGIES

The basic scenario. Accounts receivable is a material item in the
financial statements of the company being audited. The auditor is
particularly concerned with obtaining evidence regarding the "existence"
of the recorded accounts receivable balance as of the balance sheet
date.

The past audit approach. In the past the auditor has relied heavily on
confirmations of year-end balances to provide assurance regarding the
existence of the recorded accounts receivable. The sample for
confirmation has typically been selected manually by the auditor from a
hard copy printout of the client's accounts receivable trial balance.
Addresses for the selected customers have then been obtained from a
separate print out of the customer master file, and the confirmation
letters have been manually typed.

The introduction of new audit technology. In the current-year audit of
accounts receivable, the auditor has decided to apply new technology
which draws on the enhanced capabilities and ease of use of available
computer-based audit technologies. The two independent scenarios that
follow illustrate differences in the two different "types" of new audit
technologies that might be applied in this situation.

Type 1: Technologies that automate existing, established auditing
procedures. The auditor has decided to use computer assisted audit
techniques to automate portions of the accounts receivable confirmation
selection and preparation process. Specifically, a computer program is
now being used to read the client's accounts receivable trial balance
file. The selection criteria previously applied by the auditor have now
been incorporated into the computer program, and are used in selecting
the individual accounts to confirm. Once the individual accounts have
been selected the computer program retrieves the appropriate addresses
from the customer master file. Finally, the completed confirmation
letters are computer generated and laser printed.

Audit efficiencies will result in this case if the auditor is able to
select and generate the accounts receivable confirmations at a lower
cost using computer-assisted audit techniques than had been possible
with the previous manual approach.

The audit evidence being produced is essentially unchanged.

Type 2: Technologies that introduce new approaches to auditing.
Relatively simplistic analytical procedures have always been employed by
the auditor as part of the testing of the year end receivables balance.
However, in the current year the auditor decides to perform
substantially more rigorous analytical procedures. Specifically, the
auditor has decided to develop a multiple regression-based model for
predicting the year end accounts receivable balance. The prediction
generated by the model will then be compared to the client's balance to
determine the reasonableness of the reported amount.

Clearly, audit efficiencies will not result in this case if the
regression model is simply used in addition to all of the other audit
procedures that have traditionally been performed. One way that
substantial efficiencies could result is if the auditor is able to
significantly reduce or eliminate the use of accounts receivable
confirmations, and place reliance instead on the substantive audit
evidence produced through use of the multiple regression model.

Evidential matter is generated through the new technologies which was
not previously utilized by the auditor.

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